The second quarter didn’t pan out as officials at RLJ Lodging Trust expected, but they hope stronger markets and completed renovations will improve performance in the second half of 2016.
BETHESDA, Maryland—Tougher economic conditions domestic and abroad have led RLJ Lodging Trust to dial back on its projections for 2016, but company executives said they do expect some tailwinds to develop in the second half of the year.
Newly appointed RLJ Lodging Trust President and CEO Ross Bierkan told analysts and investors during a second-quarter earnings conference call that the company generated 1.9% revenue per available room growth overall. However, excluding the Houston, New York City and Chicago markets—which are each producing weaker results for varied reasons—the company’s portfolio achieved 5.1% RevPAR growth.
“Our California markets achieved exceptional RevPAR growth and outperformed the respective markets,” he said. “We expect continued strength in our West Coast markets throughout the year and also expect Chicago and Denver to improve in the second half given citywide events.”
This proved to be a trend during the call. Although the company experienced a weaker second quarter than expected, officials see signs of either growth or at least a steadied course.
RLJ Lodging pulled back its 2016 outlook, reducing its pro forma RevPAR growth projection from 3% to 5% down to 1.5% to 2.5%. Similarly, it dropped its pro forma consolidated hotel earnings before interest, taxes, depreciation and amortization from $425 million to $450 million down to $415 million to $425 million.
As of press time, RLJ Lodging’s stock is trading up 6.7% year to date.
West Coast is best coast
In the company’s top 10 markets, Northern California led the portfolio again with 9% year-over-year RevPAR growth, Bierkan said. The region has broad-based demand generators that bring in corporate and leisure demand. He said he expects hotels in that region to be a top performer for the year.
Hotels in Southern California didn’t disappoint, either. Properties in the region achieved 7.2% RevPAR growth, he said, as corporate and leisure demand continues to be strong. Those hotels will continue to benefit from that demand as well as completed renovations, he said.
“In aggregate, our two markets in California, which will represent approximately 15% of our hotel EBITDA for the year, achieved RevPAR growth of 8.3%,” he said.
Outside of RLJ Lodging’s top 10 markets, he said, those properties generated 6.4% RevPAR growth, showing the strength of a diversified portfolio. Some markets performed particularly well, he said, listing San Antonio (11.6% RevPAR growth); Portland, Oregon (10.9%); Indianapolis (10.7%); and Tampa, Florida (7.8%).
While RLJ Lodging’s New York City hotels outperformed in the market and gained market share, Bierkan said, average daily rate was down because of new rooms and shadow supply. Even with strong corporate transient demand and a slight increase in international roomnights, lower ADR led to a 3.3% decline in RevPAR.
“We do expect RevPAR growth to remain negative through the second half,” he said.
Chicago saw a 30% reduction in citywide roomnights that led to a weak performance, with RevPAR declining 7%. However, the citywide calendar looks stronger in the second half of the year, Bierkan said, and stronger performance is likely in the near future.
Oil and gas continue to be a problem for Houston, he said. On top of that, the city experienced heavy rains and lower attendance throughout the market. As a result, RevPAR declined 10.5%. Looking to the rest of the year, he said easier comps and hotels coming out of renovation could translate to outperforming in an otherwise soft market.
South Florida’s hotels saw RevPAR drop 1.7%. Economic turmoil in Brazil hurt inbound tourism, Bierkan said, and a stronger U.S. dollar dissuaded visitors from large origination destination markets, such as Canada.
“We expect the tailwinds from easier comps in the second half of the year will offset the softness in international trends that we're seeing and drive positive RevPAR growth,” he said.
A split in transient
Transient demand decelerated more than expected during the second quarter, COO and CFO Leslie Hale said. Going into the quarter, transient pace was up more than 6%, she said, but it didn’t materialize. The newest forecast shows pace trending down more than 3% year over year.
“The swing and pace trends that we are seeing are largely being driven by weak business transient demand, which represents more than 60% of our overall transient segment,” she said. “While we have some tailwinds in our portfolio for the second half of the year, in light of our year-to-date performance and continued weak demand patterns, we are adjusting our guidance downward.”
In response to an analysts’ questions, Bierkan said the transient pace deceleration was both surprising and general across the board. The company looks ahead 90 days to project transient pace, he said, keeping an eye on citywide paces and major markets where RLJ has holdings.
“While we’re firm believers that in both parts of the cycle, frankly all parts of the cycle, the transient is where you want to be, granted over the last 180 days,” he said. “The transient is the part that’s softening; although, let it be said that corporate transient is softening. It’s not leisure transient. The leisure transient is holding up just fine. The consumer is in good shape.”